Wendy's Q1 Earnings & Revenues Beat Estimates

The FINANCIAL -- The Wendy's Company on May 10 reported unaudited results for the first quarter ended April 2, 2017.

"We are pleased with our solid first quarter results as we were able to deliver high quality of earnings despite tough prior year comparisons," President and Chief Executive Officer Todd Penegor said. "Driven by our continued focus on profitably growing customer counts with a balanced marketing plan, we have now recorded 17 consecutive quarters of positive same-restaurant sales in North America. In addition to consistently delivering solid same-restaurant sales, we continue to build momentum towards our global expansion goals with 33 total new restaurant openings during the first quarter. Along with our exceptional and dedicated franchisees, we remain committed to our brand purpose of creating joy and opportunity through our food, family and community, and delighting every customer."

Financial Highlights

Total revenues were $285.8 million in the first quarter of 2017, compared to $378.8 million in the first quarter of 2016. The 24.6 percent decrease resulted primarily from the ownership of 301 fewer Company-operated restaurants at the end of the first quarter 2017 compared to the beginning of the first quarter 2016, which resulted in fewer sales at Company-operated restaurants, partly offset by higher franchise royalty revenue and fees and franchise rental income.

Company-operated restaurant margin was 16.7 percent in the first quarter of 2017, compared to 17.2 percent in the first quarter of 2016. The 50 basis-point decrease was primarily the result of increased labor rates, partly offset by lower commodity costs.

General and administrative expense was $52.4 million in the first quarter of 2017, compared to $64.7 million in the first quarter of 2016. The 19.0 percent decrease resulted primarily from lower professional fees and legal reserves, a year-over-year decrease in incentive compensation accruals and cost savings related to the Company's system optimization initiative.

Operating profit was $60.7 million in the first quarter of 2017, compared to $63.8 million in the first quarter of 2016. The 4.9 percent decrease resulted primarily from a year-over-year increase in other operating expense that was related to a lease buyout gain recognized in the first quarter of 2016, partly offset by lower depreciation and amortization expense and reorganization and realignment costs, in addition to the items discussed above, according to the Wendy's Company.

Net income was $22.3 million in the first quarter of 2017, compared to $25.4 million in the first quarter of 2016. The 12.2 percent decrease resulted primarily from the items discussed above.

Adjusted EBITDA was $89.2 million in the first quarter of 2017, compared to $98.1 million in the first quarter of 2016. The 9.1 percent decrease resulted primarily from a year-over-year increase in other operating expense that was related to a lease buyout gain recognized in the first quarter of 2016 and the ownership of 301 fewer Company-operated restaurants at the end of the first quarter of 2017 compared to the beginning of the first quarter of 2016.

Adjusted EBITDA margin (adjusted EBITDA divided by total revenues) was 31.2 percent in the first quarter of 2017, compared to 25.9 percent in the first quarter of 2016. The 530 basis-point improvement reflects the positive impact of the Company's system optimization initiative.

Reported diluted earnings per share were $0.09 in the first quarter of 2017, compared to $0.09 in the first quarter of 2016.

Adjusted earnings per share were $0.09 in the first quarter of 2017, compared to $0.11 in the first quarter of 2016. The 18.2 percent decrease resulted primarily from the items discussed above and reflects a 7 percent year-over-year reduction in the weighted average diluted shares outstanding.

Cash flows from operations were $38.6 million in the first quarter of 2017, compared to $50.8 million in the first quarter of 2016. The 24.0 percent decrease was primarily the result of an increase in working capital and year-over-year decreases in net receipt of deferred vendor incentives and net income.

Capital expenditures were $14.8 million in the first quarter of 2017, compared to $38.8 million in the first quarter of 2016.

Free cash flow (cash flows from operations minus capital expenditures) was $23.8 million in the first quarter of 2017, compared to $12.0 million in the first quarter of 2016. The 98.3 percent increase resulted primarily from a year-over-year decrease in capital expenditures, in addition to the items discussed above.

As previously announced at the Company's Investor Day on February 16, 2017, the Company expects to reduce G&A expense to approximately 1.5 percent of global systemwide sales by 2020 on its path to an adjusted EBITDA margin of 38 to 40%. Approximately three-quarters of the total G&A expense reduction of approximately $35 million is expected to be realized by the end of 2018, with the remainder of the savings being realized in 2019. The Company expects to incur total costs aggregating approximately $28 million to $33 million, of which $23 million to $27 million will be cash expenditures, related to these savings. The cash expenditures are expected to begin in the second half of 2017 and continue into 2019, with approximately half of the total cash expenditures occurring in 2018.

Image Activation

Image Activation, which includes reimaging existing restaurants and building new restaurants, remains an integral part of our global growth strategy. With 33 percent of the global system featuring the new image, the Company and its franchisees continue to expect to have approximately 42 percent of the global system image activated by the end of 2017. The Company is reiterating its 2017 net new unit growth expectations of approximately 1 percent in North America and approximately 12.5 percent in International.

The Company continues to facilitate franchisee-to-franchisee restaurant transfers ("Buy and Flips") in order to ensure restaurants are operated by well-capitalized franchisees that are committed to long-term growth. During the first quarter the Company facilitated 116 Buy and Flips and now expects to complete approximately 475 in 2017, which exceeds the original target by 75.

Company declares quarterly dividend

The Company announced today the declaration of its regular quarterly cash dividend of $0.07 per share, payable on June 15, 2017, to shareholders of record as of June 1, 2017. The number of common shares outstanding as of May 4, 2017 was 245.5 million.

Company repurchases 1.3 million shares for $17.8 million in first quarter

The Company repurchased 1.3 million shares for $17.8 million in the first quarter at an average price of $13.50 per share. The Company has approximately $132 million remaining on its existing $150 million share repurchase authorization, which expires March 4, 2018.

2017 outlook

This release includes forward-looking guidance for certain non-GAAP financial measures, including adjusted EBITDA, adjusted earnings per share and adjusted tax rate. The Company excludes certain expenses and benefits from adjusted EBITDA, adjusted earnings per share and adjusted tax rate, such as impairment of long-lived assets, reorganization and realignment costs and system optimization gains, net. Due to the uncertainty and variability of the nature and amount of those expenses and benefits, the Company is unable without unreasonable effort to provide projections of net income, earnings per share or reported tax rate or a reconciliation of projected adjusted EBITDA, adjusted earnings per share or adjusted tax rate to projected net income, earnings per share or reported tax rate.

During 2017, the Company now expects:

Adjusted EBITDA of approximately $400 to $406 million, an increase of approximately 2 to 4 percent compared to 2016.

Company-operated restaurant margin of approximately 18.5 percent.

Commodity cost inflation of approximately 1.5 to 2.0 percent compared to 2016.

General and administrative expense at the low end of its previously issued range of approximately $210 to $220 million.

In addition, the Company continues to expect:

Adjusted earnings per share of approximately $0.45 to $0.47, an increase of approximately 13 percent to 18 percent compared to 2016.

Same-restaurant sales growth of approximately 2 to 3 percent for the North America system.

Labor inflation of approximately 4 percent.

Interest expense of approximately $115 million.

Depreciation and amortization expense of approximately $120 million, including accelerated depreciation of approximately $2 million.

Cash flows from operations of approximately $240 to $275 million.

Capital expenditures of approximately $80 to $90 million.

Free cash flow of approximately $160 to $185 million.

An adjusted tax rate of approximately 32 to 34 percent.

Company on track to achieve 2020 goals

The Company continues to expect to achieve the following goals by the end of 2020: